PepsiCo, Inc. Fundamental Analysis
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PepsiCo, Inc.
Last Updated: 3 Oct 2023
NASDAQ: PEP
GICS Sector: Consumer Defensive
Sub-Industry: Beverages — Non-Alcoholic
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Table of Contents
You can download a summary of PepsiCo, Inc's fundamental analysis in PDF here.
Management
CEO: Ramon Laguarta
Tenure: 5.0 years
PepsiCo, Inc's management team has an average tenure of 4.6 years. It is considered experienced.
Source of Revenue
PepsiCo, Inc. manufactures, markets, distributes, and sells various beverages and convenient foods worldwide.
The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
Frito-Lay North America
FLNA produces and sells various branded convenient foods like dips and popular snacks like Cheetos, Doritos, Lay’s, and more. They distribute these products to independent distributors and retailers. FLNA also partners with Strauss Group to sell Sabra refrigerated dips and spreads.
Quaker Foods North America
QFNA produces and sells various branded convenient foods like cereals, rice, pasta, and other products. Some of their popular products include Cap’n Crunch cereal, Quaker Chewy granola bars, and Rice-A-Roni side dishes. They distribute these products to independent distributors and retailers.
PepsiCo Beverages North America
PBNA produces and sells various beverages under brands like Aquafina, Gatorade, Pepsi, and more. They have their bottling plants and sell finished goods directly to distributors and retailers. PBNA also works with independent bottlers in some markets. They have joint ventures for tea and coffee with Unilever and Starbucks. Additionally, they distribute licensed brands like Crush and Dr Pepper. In 2022, they began distributing Hard MTN Dew, an alcoholic beverage. They sold some juice brands in 2022 but retained a 39% interest in a joint venture called Tropicana Brands Group (TBG). PepsiCo exclusively distributes TBG's brands to certain customers in the US.
Latin America
LatAm produces and sells various convenient food brands like Cheetos, Doritos, Lay’s, and Quaker. They also handle beverage concentrates and finished goods for brands like Gatorade and Pepsi. These products are distributed to authorized bottlers, independent distributors, and retailers.
Europe
Europe produces and sells various convenient food brands like Cheetos, Doritos, Lay’s, and Quaker. They also handle beverage concentrates for brands like Pepsi and 7UP. These products are sold to authorized bottlers, distributors, and retailers. Europe also manufactures SodaStream products and dairy items like Agusha and Chudo. They have a joint venture with Unilever for Lipton tea. In 2022, they sold some juice brands but retained a 39% interest in TBG.
Africa, Middle East and South Asia
AMESA produces and sells various convenient food brands like Chipsy, Doritos, and Lay’s. They also handle beverage concentrates for brands like Pepsi and 7UP. These products are sold to authorized bottlers, distributors, and retailers. In some markets, AMESA operates its bottling plants. They also have a joint venture with Unilever for Lipton tea.
Asia Pacific, Australia and New Zealand and China Region
APAC produces and sells various convenient food brands like BaiCaoWei, Cheetos, and Lay’s. They also handle beverage concentrates for brands like Pepsi and 7UP. These products are sold to authorized bottlers, distributors, and retailers. APAC also partners with Unilever for ready-to-drink tea products under the Lipton brand.
PepsiCo, Inc. serves wholesale and other distributors, food service customers, grocery stores, drug stores, convenience stores, discount/ dollar stores, mass merchandisers, membership stores, hard discounters, e-commerce retailers and authorized independent bottlers, and others through a network of direct-store-delivery, customer warehouse, and distributor networks, as well as directly to consumers through e-commerce platforms and retailers.
The company's operating profit increased by 3%, but the operating margin decreased by 0.7 percentage points. The profit growth was driven by higher revenue and cost savings, although this was partially offset by increased operating costs and higher commodity prices. There were unfavorable impacts from impairment charges, charges related to the Russia-Ukraine conflict, and brand portfolio adjustments. These were partly balanced by gains from the Juice Transaction.
PepsiCo, Inc. Reportable Segment Revenue FY2022
PepsiCo, Inc. Economic Moat
PepsiCo, Inc. Economic Moat
Economic Moat: Narrow
There are many ways to identify PepsiCo, Inc.’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of PepsiCo, Inc.. Please check my summary to understand more about the economic moat.
Performance Checklist
Is PepsiCo, Inc.’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? Inconsistent.
PepsiCo, Inc. Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
PepsiCo, Inc. FCF per Share
Management Effectiveness
Is PepsiCo, Inc.’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.
PepsiCo, Inc. Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.
PepsiCo, Inc. Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
PepsiCo, Inc. Shares Outstanding (Million Shares)
PepsiCo, Inc. Financial Health
PepsiCo, Inc. Financial Health (USD Million)
Current Ratio: 0.8 (fail my requirement of >1.0)
Debt-to-EBITDA: 3.2 (fail my requirement of <3.0)
Interest Coverage: 13.9 (pass my requirement of >3.0)
Debt Servicing Ratio: 7.9% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 3.0%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
PepsiCo, Inc.’s dividend payments are reasonably covered by its earnings but not its cash flows.
PepsiCo, Inc. Intrinsic Valuation
Estimated intrinsic value: $74.37
Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$6,100M
Projected growth rate: 8%
Beta: 0.6
Discount rate: 6.0%
Margin of safety: 45% (Uncertainty: High)
Price range after the margin of safety: <$41.00
Date of calculation: 3 Oct 2023
PepsiCo, Inc. Valuation
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
PepsiCo, Inc. Intrinsic Valuation
PepsiCo, Inc. Relative Valuation
PepsiCo, Inc. EV-to-EBITDA vs its peers
PepsiCo, Inc. Price-Earnings Ratio vs its peers
PepsiCo, Inc. Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
The demand for PepsiCo's products depends on its ability to adjust to changing consumer preferences and trends. These preferences are influenced by factors like demographics, online shopping habits, pricing, product quality, packaging (especially regarding the environment), and health-related perceptions. External events like pandemics, such as COVID-19, can also significantly affect consumer behavior.
Furthermore, PepsiCo's brand image, advertising, and engagement with consumers through various channels, including digital media, are crucial. Failing to respond effectively to these changes or make strategic investments, like in data analytics, may lead to reduced demand, inventory losses, and harm its competitive position.
PepsiCo's success relies on its ability to grow in developing and emerging markets like Mexico, the Middle East, China, South Africa, Brazil, and India. However, there's no guarantee its products will succeed in every market due to factors like competition, pricing, cultural differences, and distribution methods. Economic, political, and social conditions, as well as potential conflicts or unrest, can affect its operations in these markets.
Government regulations, currency challenges, legal systems, and compliance with international laws can also be potential obstacles. Failing to effectively navigate these issues could negatively impact PepsiCo's business and investment returns in these markets.
Summary for PepsiCo, Inc.
PepsiCo, Inc. has a strong position in the global snacks and beverage market thanks to its intangible assets and cost advantage. The company benefits from popular brands, customer loyalty, and good relationships with retailers. Its large size gives it negotiating power and lower costs, providing an advantage that's hard for competitors to overcome.
In the global savory snacks market, PepsiCo leads with 22% control. They own well-known brands like Lay's, Cheetos, and Doritos. Despite their strong position, they continue to innovate to meet changing consumer preferences, ensuring their snack brands stay popular and maintain pricing power. Over the past five years, they have raised prices by an average of 2.8% each year while keeping volume steady, demonstrating their industry strength.
After Coca-Cola, PepsiCo is the second-largest beverage company. They offer a wide range of popular brands in both soft drinks and other beverage categories. They excel in carbonated soft drinks and have room to grow, particularly in emerging markets.
In categories like sports and energy drinks, PepsiCo has gained market share with brands like Gatorade. They are working to catch up in the energy drink market with brands like Rockstar and Mountain Dew. They also have a strong presence in ready-to-drink coffee and tea with brands like Lipton and Starbucks. This helps them stay competitive and build strong relationships with retailers.
The company is a crucial partner for retailers, from grocery stores to gas stations. They provide a wide range of popular snacks and beverages, along with efficient logistics systems. This makes it easy for stores to plan, stock, and restock their inventory, which is especially important now with many retailers facing shipping delays. In return, PepsiCo gets prominent shelf space and can run in-store promotions. They also collaborate closely with retailers to understand consumer trends and improve business strategies, which helps them stay successful in the market.
PepsiCo has a significant advantage in cost control. Due to its size, they have a strong position when negotiating prices for things like ingredients and advertising. They only spend a small percentage on key ingredients like sugar and seasoning, which helps them manage costs even in times of high inflation.
Their extensive distribution network also gives them an edge. They can reach more stores and customers quickly and at a lower cost, allowing them to introduce new products and attract partners to use their distribution platform. Their long-standing partnerships with Unilever and Starbucks in tea and coffee illustrate how well they manage distribution.
Considering these competitive advantages, it is evident that PepsiCo, Inc. operates with a narrow economic moat. Their robust brand portfolio, efficient logistics, and strategic retailer collaborations provide a formidable barrier to competitors. This, coupled with their adept cost management, solidifies their position as a company with a narrow economic advantage.
Over the past five years, PepsiCo, Inc. has demonstrated a commendable track record in terms of revenue growth, consistently showing positive year-over-year expansion. However, when it comes to net income, the company's performance has been somewhat variable, displaying inconsistent growth patterns. Similarly, the cash flow from operating activities has not followed a steady upward trajectory, exhibiting fluctuations over the same period.
On a positive note, PepsiCo has managed to maintain a positive free cash flow throughout these five years. Nevertheless, the gross margin percentage has shown some inconsistency, indicating that it has not been steadily growing. Likewise, the free cash flow per share has not exhibited a consistent growth trend, showing some variability in its performance over the past five years.
PepsiCo, Inc. has demonstrated a robust approach to capital allocation over the past five years. Their ROE consistently falls within the impressive range of 12% to 15% year on year, indicating a strong utilization of shareholders' equity. Notably, this surpasses the industry average ROE, underscoring PepsiCo's effectiveness in generating returns compared to its peers.
Moreover, the ROIC also maintains a steady 12% to 15% range annually, showcasing the company's ability to generate profitable returns from its invested capital. PepsiCo's ROIC consistently outperforms its WACC, further emphasizing its efficient capital allocation strategy. Additionally, the declining trendline in the number of shares outstanding is a positive signal for investors, indicating that the company is actively managing its capital structure, a move that typically bodes well for shareholder value.
PepsiCo, Inc. displays a mixed picture in terms of its financial health. The current ratio, standing at 0.8, falls below the desired threshold of 1.0, indicating potential challenges in meeting short-term obligations with current assets alone. The debt-to-EBITDA ratio is at 3.2, surpassing the preferred level of 3.0, suggesting a relatively higher debt burden compared to earnings. However, there are positive signs as well.
The interest coverage ratio stands at a healthy 13.9, indicating the company's robust capacity to meet interest payments comfortably. Additionally, the debt servicing ratio of 7.9% is well below the recommended limit of 30.0%, demonstrating that PepsiCo is efficiently managing its debt in relation to its income.
Investing in PepsiCo, Inc. warrants careful consideration. The company boasts a narrow economic moat, suggesting it possesses a competitive edge in its industry. However, its performance and balance sheet have been less than satisfactory, signaling some challenges. On a positive note, PepsiCo demonstrates strong capital allocation strategies, a crucial factor for long-term success. Yet, it is important to acknowledge that investing in this company carries a notable degree of uncertainty.
To mitigate potential risks, a high margin of safety of 45% is advised. This means that an investor should seek a significant discount on the perceived intrinsic value of the stock before considering an investment. This cautious approach can help navigate the uncertainties associated with PepsiCo and potentially lead to a more favorable investment outcome.
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